Fitch Affirms TeliaSonera at 'A-'; Outlook Stable

Mon Jun 10, 2013 12:14pm EDT

(The following statement was released by the rating agency) LONDON, June 10 (Fitch) Fitch Ratings has affirmed TeliaSonera AB' (TeliaSonera) Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook. Fitch has also affirmed TeliaSonera's bonds' senior unsecured ratings at 'A-.' TeliaSonera's ratings are supported by its leading market positions in its domestic Nordic markets complimented by a Eurasian portfolio whose growth profile provides a useful offset to the maturity and competitiveness at home. Above average free cash flow generation, a management that appears to recognise the challenges facing its industry, and relatively conservative financial policies all provide additional support. A well spread out maturity profile and commitment to unadjusted leverage (net debt to EBITDA) range of 1.5x - 2.0x underline its financial policies. KEY RATING DRIVERS Strong Market Positions Teliasonera's rating is supported by its incumbent market positions in Sweden and Finland, which contributed 51% of the group's last-12-months' (LTM) EBITDA at end-Q113. These assets are complemented by its strong market positions in Eurasia (its operations in central Europe and western Asia), which give the company exposure to high-growth, under-developed markets. Low Leverage, Conservative Policy Teliasonera's net debt/EBITDA fell to 1.54x at end-Q113, down from 2x at end-Q112. This is the lowest across Fitch's European rated telecoms universe, although leverage is expected to increase somewhat in Q213 due to the payment of annual dividends. Management's stated commitment to maintain leverage between a range of 1.5x - 2x provides further support for the current rating. Megafon Resolution Due to the resolution of the OAO Megafon ('BB+'/Stable) shareholder dispute and the resulting IPO, Teliasonera is now more likely to receive an annual cash dividend from Megafon, in addition to having a greater potential to sell down more of its shareholding. This improved liquidity is credit positive for Teliasonera. No Yoigo Sale Teliasonera's announcement that it will not dispose of its Spanish operations does not materially impact its rating. Although overall growth has slowed in 2012, the company continues to win market share and improve profitability. However, competition is expected to increase in the coming year, with Telefonica SA ('BBB+'/Negative) expected to continue to push its quad play offering. This could continue to affect mobile-only players such as Yoigo. Mixed Trends in Eurasia Growth and profitability in the region remains strong, and the region now makes up 29% of Teliasonera's EBITDA. Recently, growth has been driven by a strong performance in Uzbekistan where, due to the suspension of OJSC Mobile TeleSystems (MTS; 'BB+'/Stable) license, competition is now only between Teliasonera and one other operator. Fitch notes that revenues grew by 75% in Q113 and the EBITDA margin increased to 54.6% in Q113 from 33.5% in Q112. Growth in Uzbekistan has been partially offset by slowing growth in Kazakhstan, where Tele2 is aggressively trying to win market share and has brought considerable pricing competition to the market. Fitch estimates that revenue growth was minus 5% in Q113, which compares unfavourably with the 17% growth of 2011. If Uzbekistan remains a two-player market, Fitch believes that growth here could offset the expected continuation of slow growth in Kazakhstan. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: At 'A-' the company is among the highest rated of Fitch's universe of European telecom operators. The company's present operating and financial profile sit well at the current rating level. A commitment to materially more conservative financial policies would be most likely to provide upward ratings pressure. This is not however deemed likely at present. Negative: Future developments that could lead to negative rating action include: High Leverage, Swedish Weakness: Fitch would consider a negative rating action if funds from operations (FFO) adjusted net leverage was to trend above 2.5x (net debt: EBITDA of 2x) for a sustained period of time. A substantial increase in competition or a weakening of the Swedish economy could also lead to a negative rating action. Contact: Principal Analyst Owen Fenton Associate Director +44 20 3530 1423 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Mike Dunning Managing Director +44 20 3530 1178 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012; 'Rating Telecom Companies', dated 9 August 2012, are available on www.fitchratings.com. 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